Sources of rules and practice


Provide an overview of the primary sources of law, regulation and practice that govern or affect executive compensation arrangements or employee benefits.

In Spain, there is a distinction between directors, whose relationship has a commercial nature, and executives bound by an employment relationship.

As regards executives with an employment relationship a distinction is made between top executives and ordinary executives.

Top executives are the employees who exercise authority inherent in the legal ownership of the company, referring to the general aims of the company and acting with independence and full responsibility. Their relationship is ruled by Royal Decree No. 1382/1985 and by civil laws.

For other executives, general employment regulation applies, consisting of the Workers’ Statute and the relevant collective bargaining agreements, since they are considered as ordinary employees.

Conversely, directors’ remuneration is regulated by the Companies Act. In addition, in case of listed companies, there are certain recommendations regarding directors’ remuneration included in the Good Governance Code of Listed Companies. Recommendations included in the Good Governance Code are subject to the internationally recognised ‘comply or explain’ approach.


What are the primary government agencies or other entities responsible for enforcing these rules?

Employment courts have jurisdiction for litigation arising from executives with employment relationships (including but not limited to compensation). Additionally, the Employment Inspectorate is in charge of surveillance and control of compliance with employment rights, and application, if required, of the relevant sanctions.

Commercial litigation courts have exclusive jurisdiction for litigation matters regarding any breach related to commercial and corporate conduct. Competence for investigating and for imposing the respective sanctions regarding any infringement of the Securities Law is granted to the Spanish Securities Market Commission.


Governance requirements and shareholder approval

Are any types of compensation or benefits generally subject to specific corporate governance requirements or approval by shareholders or government agencies? What is the general process for obtaining approval?

According to the Companies Law, the position of a director is uncompensated, unless the articles of association otherwise provide (other than in the case of listed companies, where the position of a director is compensated unless the articles of association state otherwise), specifying the compensation scheme. The maximum amount of annual compensation of all directors in their capacities as such must be approved by the general meeting. Unless otherwise determined by the general meeting, the distribution of the compensation among the members of the board of directors will be established by resolution passed by the board.

When the compensation scheme includes profit sharing, the articles of association will specifically determine the share or maximum percentage thereof. In the latter case, the general meeting will determine the applicable percentage within the maximum established in the articles of association.

In a public limited company, when the compensation scheme for directors includes the delivery of shares or stock options or compensation indexed to the value of the shares, the articles of association must expressly contemplate this, and application thereof will require a resolution of the general meeting of shareholders. The resolution of the general meeting must include the maximum number of shares that may be assigned in each year, the exercise price or the system for calculation of the exercise price of stock options, the value of the shares, if any, taken as a reference and the term of the plan.

In addition, it must be noted that executive directors (those directors each of whom perform management functions within the company or its group, whatever the legal relationship he or she maintains with it, and at the same time is or represents a significant shareholder or a shareholder that is represented on the board of directors) shall enter into a contract with the company. The contract to be entered into between the executive director and the company must be approved in advance by the board of directors with the majority vote of two-thirds of its members. The contract must be consistent with the compensation policy, if any, approved by the general meeting. Remuneration of non-director executives reporting to the board of directors has also to be approved by the board.

Finally, compensation of the directors of listed companies should consider the recommendations of the Good Governance Code, which include recommendations about types of compensation and certain limits regarding them (eg, sufficiency of the compensation for attracting and retaining directors; variable remuneration should be linked to the company by means of rights to acquire shares, long-term savings schemes, etc; inclusion of limits and technical safeguards to ensure that compensation is linked to performance; and limits to termination payments).


Under what circumstances does the establishment or change of an executive compensation or benefit arrangement generally require consultation with a union, works council or similar body?

Under Spanish law there are no express provisions dealing with obligations as regards workers’ representatives in the event of establishment change or termination of an executive compensation or benefit arrangement.

Nevertheless, a general provision exists concerning the implementation and review of incentive plans. In this event, the workers’ representatives are entitled to issue a report prior to the implementation of the plan, but the decisions to be taken by the employer are not subject to such report.

On a separate note, whenever the changes or termination of the compensation or benefit arrangement constitute a collective substantial modification of a consolidated remuneration scheme for employees, such change must be grounded on certain reasons legally established and follow a consultation period with workers’ representatives.

Prohibited arrangements

Are any types of compensation or benefit arrangements prohibited either generally or with respect to senior management?

In general terms there is no legal prohibition for a specific type of compensation. However, certain companies which are participated, funded, state owned or under government or state supervision (eg, savings banks) used to have restrictions or limits on types or amounts (or both) of compensation.

In addition, in case of listed companies, the Good Governance Code establishes certain recommendations that limit compensation (eg, termination payments should not exceed a fixed amount equivalent to two years of the director’s total remuneration and should not be paid until the company confirms that he or she has met the predetermined performance criteria).

Rules for non-executives

What rules apply to compensation and benefits of non-executive directors?

Non-executive directors are subject to the same rules as other directors.

In case of listed companies, the Good Governance Code establishes certain recommendations (ie, variable remunerations linked to the company’s and director’s performance, the award of shares, options or any other right to acquire shares or to be remunerated on the basis of share price movements, and membership of long-term saving schemes such as pension plans should be confined to executive directors).


Mandatory disclosure of executive compensation

Must any aspects of an executive’s compensation be publicly disclosed or disclosed to the government? How?

By-laws shall include the relevant references of which type of compensation can be paid to the directors. Annual accounts shall also include the relevant reference regarding the type and amounts paid to the directors.

In addition, listed companies have the following reporting undertakings, among others:

  • annual reports and annual compensation reports (in which the type and concept of compensations paid to the directors shall be included); and
  • specific notices regarding compensation programmes granted in favour of directors or senior management to be submitted to the Spanish Securities Market Commission, and published on the company’s website.

Employment agreements

Common provisions

Are employment agreements required or prevalent? If so, what provisions are common? Are any terms prohibited or unenforceable?

For non-director executives, employment agreements regulate main employment conditions (length, working time, category, basic salary and if the case may be, bonus).

Severance clauses are mainly agreed in top executive agreements, these being not so usual where the executive is an ordinary employee since statutory coverage is quite broad for this type of employee.

As regards post-employment restrictive covenants, they have to be agreed expressly with the executive and are limited to a maximum of two years. The executive has to receive adequate compensation for the restrictive covenant.

Nevertheless, it is not necessary that all employment conditions are included in an employment agreement. Complex benefit and compensation schemes are usually beyond the scope of the employment agreement, instead being regulated in company policies. Whenever an ordinary employment applies, clauses that contravene statutory provisions and the relevant collective bargaining agreement are generally unenforceable.

Incentive compensation

Typical structures

What are the prevalent types and structures of incentive compensation? Do they vary by level or type of organisation?

Considering the current international corporate environment, types and structures of incentive compensation must be designed according to a global compensation scheme.

Each company designs its global compensation scheme to attract talent and retain it according to its sector of activity, size and life cycle. Big listed companies may design share-based incentives for their executives aligned with the shareholders’ interests, and on the other side a start-up company may address its incentives with the achievement of the highest selling price of the company in mind.

In any case, and following proxy advisers’ recommendations, the common practice on incentive compensation is to establish short and long-term schemes of variable compensation, to link it to the achievement of specific financial and non-financial targets and to limit the amount of the variable compensation to a certain percentage of the fixed remuneration.


Are there limits generally on the amount or structure of incentive compensation? Are there limits that adversely affect the tax treatment of the compensation relative to the employer or the executive?

As a general rule, according to the Workers’ Statute, the total amount of annual remuneration that an employee can receive in kind for all concepts cannot exceed 30 per cent of his or her total annual remuneration (ie, fixed and variable remuneration).

In addition, for certain sectors, there is a specific regulation that imposes restrictions on the remuneration satisficed to certain employees and executives of companies operating in those sectors. Among others, entities affected by these specific provisions are as follows:

  • credit institutions;
  • management companies of collective investment institutions;
  • management companies of closed-end investment companies; and
  • insurance companies.

These limits mainly affect the following:

  • the determination and form of payment of the variable remuneration approved (ie, clauses malus and clawback);
  • the design and payment of social security insurance; and
  • the limits and form of reimbursement of severance payments.

For instance, the law on management, supervision and solvency of credit institutions (Law No. 10/2014) establishes for certain key employees of the company that the variable component shall not exceed 100 per cent of the fixed component of their total remuneration (it can reach 200 per cent in case of approval by the shareholders’ meeting).

From a tax point of view, the main limits are applicable on severance payments. Costs derived from the remuneration paid to employees and executives are deductible for the employer for Spanish corporate tax (SCT) purposes as long as the criteria below are met, as follows:

  • the accounting expense borne by the employer is linked to an activity effectively performed in favour of the employer;
  • if applicable, the approval procedure settled by corporate legislation has been followed; and
  • transfer pricing formal requirements are fulfilled.

The deductible amount is limited to the obligatory amount established in the Workers’ Statute, with the limit of €1 million.

In addition, the Personal Income Tax Law (PIT) establishes that indemnities for worker dismissal or severance payments derived from the termination of ordinary employment contracts can be exempt from taxation in the obligatory amount established in the Workers’ Statute, with the limit of €180,000.


Is deferral and vesting of incentive awards permissible? Are there limits on the length or type of vesting and deferral provisions?

Deferral and vesting of incentive awards are permissible according to the relevant Spanish laws.

There are the usual recommendations of proxy advisers who are establishing standards in various aspects of corporate governance in relation to remuneration of directors and senior management, such as in respect to vesting periods. The most recent recommendations have advised that the minimum vesting period should be no less than three years from the grant date.

In addition, and for financial entities, Law No. 10/2014 establishes that at least 40 per cent of the variable remuneration must be deferred over a period which is not less than three to five years. The deferred amount should be 60 per cent in case of significantly large amounts of variable remuneration.

Are there limitations on the individuals or groups eligible to receive the compensation? Are there aspects of the arrangement that can only be extended to certain groups of employees?

In addition to the main legal limitations set out in the question 10, Spanish companies tend to follow the recommendations of the the Good Governance Code, which is in line with proxy advisers’ recommendations.

The Good Governance Code proposes some restrictions for variable remunerations of directors, among others:

  • variable remuneration components should be deferred (for not less than three years);
  • shares granted to non-executive directors should be retained until the end of their mandate;
  • a major part of executive directors’ variable remuneration should be linked to the award of shares and the executive directors should maintain a number of shares equivalent to twice their annual fixed remuneration; and
  • termination payments to directors should not exceed a fixed amount equivalent to two years of their total annual remuneration.
Recurrent discretionary incentives

Can it be held that recurrent discretionary incentive compensation has become a mandatory contractual entitlement? Is this rebuttable?

There are some circumstances under which, in principle, discretionary incentive compensation could be construed as consolidated contractual obligations before courts. For example, if the company pays the workers the same amount for this ‘discretionary incentive’ every year, workers could claim for it to be considered a consolidated and, hence, mandatory contractual obligation. A court must decide whether the continued grant of the same benefit entails that it has been considered as a consolidated right.

Effect on other employees

Does the type or amount of incentive compensation awarded to an executive potentially affect the compensation that must be awarded to other executives or employees?

Even though there could be some differences whenever it could be objectively justifiable, the scheme should respect, in any event, equality and non-discrimination principles. It is recommended that objective criteria are used and are applied to all executives of the same category.

Mandatory payment

Is it permissible to require repayment of incentive compensation under certain circumstances? Are there circumstances under which such repayment is mandatory?

Employers in Spain, as a general principle, cannot claim the repayment of any salary item, unless it could be proved that there was a mistake in the payment to a specific worker (the amount actually was not due). The aforementioned is different to the following:

  • a circumstance in which the payment has the nature of an advanced payment on account of the final vested amount, regulated as such; and
  • the application of clawback clauses to executives regarding their variable remuneration.

Can an arrangement provide that payment is conditioned on continuing employment until the payment date? Are there exceptions?

In principle, payments of variable remuneration can be conditional on the employee remaining until the date of payment.

However, whenever termination is decided by the employer with no cause (unfair dismissal) some case law understands that the payment is due, since it is considered that the worker would have been deprived of a right by an ungrounded unilateral decision of the company. This could constitute a breach of section 1256 of the Civil Code, which forbids the performance of the contract being left up to the discretion of one of the parties (the employer). Additionally, the clause could be unenforceable if the performance period of accrual of the payment has concluded when termination takes place.

Equity-based compensation

Typical forms

What are the prevalent forms of equity compensation awards in your jurisdiction? What is a typical vesting period? Must the arrangements be offered to a broad group of employees, or can the employer select the participants?

The most common share-based incentive plans in Spanish jurisdiction are the following.

Schemes indexed to the value of the shares.
  • Restricted stock unit plans, which consist of the granting of a specific number of units, or a promise to deliver shares, which confer the holder the right to receive free shares on one or more dates, provided that certain requirements are met.
  • Deferred stock bonus plans, which consist of the delivery of restricted stock, based on the number of shares that the beneficiary acquires with all or part of his or her annual variable compensation.
Schemes indexed to share-price appreciation
  • Stock options plans, which consist of the granting of a certain number of options, free and non-transferable, to purchase shares in the company. After a vesting period, the options may be exercisable on one or several exercise dates.
  • Stock appreciation rights plans, which consist of the granting of a specific number of rights entitling the holder to receive, after a certain period of time has elapsed, an incentive in cash or in shares based on the value increase of the shares between the start and end date of the plan.

There are no restrictions for companies in establishing the vesting period of the equity-based incentives. However, as stated in question 11, proxy advisers have been recommending in recent years that vesting periods of at least three years are established.

The employer can decide to select the participants on the offered plan. It should respect, in any event, equality and non-discrimination principles. Regardless, it is recommended that objective criteria are used.

Must equity-based compensation be granted by the company’s board of directors (or its committee) or can the authority be delegated to officers or employees of the company? Are there limitations or requirements that apply to delegation?

Share-based incentives addressed to directors of Spanish companies must be expressly contemplated in the company by-laws, and shall require the approval of the shareholders’ meeting of the company. For executives reporting directly to the board, their participation in equity-based compensation should be approved by the board of directors, since it is considered as a basic term of their contracts (notwithstanding the possibility of the board choosing to delegate the execution of such contracts). For the rest of employees, the approval of their participation in equity-based compensation will be approved by the person who has this faculty (ie, the chief executive officer and human resources director, etc).

Tax treatment

Are there forms of equity compensation that are tax-advantageous or disadvantageous to employees or employers?

Equity-based compensation plans can imply special tax treatment for employees. Under the current PIT Law, an annual exemption of €12,000 can be applicable to the remuneration in kind derived from the delivery of shares of a company to its employees as a consequence of the participation in the company or other group company under certain conditions.

As long as the PIT Law requires that the delivery of shares has to be made to active workers, this exemption should not be applicable to any member of the board of directors.

In addition, there is a 30 per cent reduction on irregular income which can be applied, up to an annual gross amount of €300,000, in case the below requirements are met, as follows:

  • the remuneration must have been generated over a period of more than two years;
  • in the previous five tax years, the individual has not received any other income generated in more than two years on which the reduction has been applied; and
  • the income must always be imputed for tax purposes in a single tax period.

Does equity-based compensation require registration or notice? Are exemptions, or simplified or expedited procedures available?

Notwithstanding the reporting obligations described in question 7, it must be noted that:

  • The offer of shares by a company to qualified investors or to fewer than 150 natural or legal persons (other than qualified investors) is not considered as a public offering pursuant to article 1.4 of Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC (the Prospectus Regulation).
  • In case that the offer of shares is aimed at more than 150 individuals, if such offer of shares is aimed at existing or former directors or employees by their employer or by an affiliated undertaking, and provided that said securities are of the same class as the securities already admitted to trading on the same regulated market and that a document is made available containing information on the number and nature of the securities and the reasons for and details of the offer or allotment, it will not require a prospectus pursuant to articles 1.4 and 1.5 of the Prospectus Regulation.
Withholding tax

Are there tax withholding requirements for equity-based awards?

Shares derived from equity-based awards are considered as employment income in kind subject to withholding requirements by the employer company at a progressive tax scale ranging from 19 per cent to 45 per cent (the 45 per cent is applicable for a tax base as of €60,000).

When incentive compensation is paid in shares, in order to manage the withholding obligation, it is common practice to deduct a number of the shares, corresponding to the value of the withholding tax due, from the gross amount of shares to be granted, and only deliver to the beneficiary the net number of shares amount.

Inter-company chargeback

Are inter-company chargeback agreements between a non-local parent company and local affiliate common? What issues arise?

It is, indeed, advisable to proceed with such an agreement in place, in order to enable evidencing the nature and rest of the features of the expenses and correlative income deriving from such equity-based compensation schemes between foreign parent and local affiliate entities.

It is particularly important to consider tax issues, in order to ensure a proper treatment of both income and expenses. In this respect, transfer pricing rules must also be observed, and intragroup transactions arising from the implementation of these schemes have to be valued at arm’s length and included (if applicable) within the compulsory reports to be produced.

Stock purchase plans

Are employee stock purchase plans prevalent or available? If so, are there any frequently encountered issues with such arrangements?

Stock purchase plans are frequently implemented by Spanish listed companies. In this regard, it is important to determine if the purchase is made from the gross remuneration, in order to be considered as compensation in kind, or from the net remuneration, which involves a direct purchase by the employee.

In any case, it is a common practice that shares must be held by the employee during a specific period of time and, after that period has elapsed, the company usually offers a matching of free shares based on the number of shares purchased and held by the employee.

Employee benefits

Mandatory and voluntary employee benefits

Are there any mandatory benefits? Are there limits on changing or discontinuing voluntary benefits that have been provided?

The social security scheme provides for health insurance and unemployment, disability and retirement public benefits, among others. Workers are also entitled to paid holidays.

Typical employee benefits and incentives

What types of employee benefits are prevalent for executives? Are there tax or other financial incentives or disincentives for such employee benefit arrangements?

There are different alternatives usually offered by Spanish companies under their benefit policies consisting of in-kind compensation and flexible work agreements. Companies are aware that the solution to incentivise their employees is not always to pay more, but to pay better. In this regard, companies use different in-kind elements in order to individualise the compensation for every employee’s needs, this also having favourable tax treatment increasing the net amounts received by employees.

Some of these benefits are not taxable. These include, according to certain conditions:

  • meal vouchers;
  • medical insurance;
  • nursery school services;
  • training programmes;
  • accident insurance; and
  • transport vouchers.

Termination of employment

Rules for termination

Are there prohibitions on terminating executives? Are there required notice periods? May executives be dismissed without cause?

In principle, there are no restrictions on termination of employees, even though in some cases (breach of fundamental rights or discrimination, among others) the termination may be deemed null and void and the ordinary employee will be reinstated.

In the event of ordinary employees only the objective dismissal requires a notice period (15 days), but it does not exclude or replace the statutory severance payment (see question 27).

As regards top executives, in the event of unilateral withdrawal of the executive, the employer could communicate to the executive the termination of his or her contract with three months’ prior notice, which could increase to a maximum of six months’ prior notice if it was established in the executive’s contract, plus a severance of seven days’ salary per year of service up to six months’ payment (or severance agreed in the contract). A summary of the statutory severances is set out in question 27.

Mandatory severance pay

Are there statutory or mandatory minimum severance requirements? Are there any other mandatory, post-employment benefits?

Main mandatory severances established for ordinary employees are as follows:

  • in case of dismissals based on objective grounds, severance is up to 20 days’ salary per year of seniority capped at 12 months’ payment plus 15 days’ notice period; and
  • in the event of dismissals declared unfair (including objective dismissals with no cause), severance of 33 days’ salary per year worked, up to a maximum of 24 months’ salary (for contracts formalised before 12 February 2012, severance will be calculated at 45 days’ salary per year of service for the time worked up to such date and at 33 days’ salary per year of service for time worked thereafter, in which case the severance can be no more than 720 days’ salary, unless the severance corresponding to the period prior to 12 February 2012 results in an amount of days above this, in which case this shall be the maximum severance, notwithstanding the 42 monthly instalments cap).

Statutory provisions for top executives are as follows:

  • in the event of unilateral withdrawal, the employer could communicate to the executive the termination of his or her contract with three months’ prior notice, which could increase to a maximum of six months’ prior notice if it was established in the executive’s contract, plus a severance of seven days’ salary in cash per year of service up to six months’ payment; and
  • in case of unfair dismissal, severance consists of 20 days’ salary in cash per year of service up to a maximum of one yearly payment.

Salary for severance purposes includes all items in cash and kind and most of the benefits’ cost. Any kind of incentive or variable compensation will be taken into account in order to calculate the severance compensation established by law. According to Spanish employment case law, share-based incentives are also considered as cash.

There are no mandatory post-employment benefits, unless they are established in employment contracts and, if applicable, the relevant collective bargaining agreement.

In all cases of termination, salaries and holidays accrued and not satisfied must be paid.

Typical severance pay

What executive severance payment level is typical?

Severance clauses are mainly agreed in top executive agreements, these being not so usual where the executive is an ordinary employee since statutory coverage is quite broad for this type of employee.

Severance agreed for top executives may take several forms: lump sums, yearly instalments or application of the same rules of severance corresponding to ordinary employees.

Reasons for dismissal

Are there limits on dismissal for ‘cause’? Are there any statutory limits on ‘constructive dismissal’ or ‘good reason’? How are ‘cause’ or ‘constructive dismissal’ defined? Are there legal or customary rules relating to effecting a termination for ‘cause’ or ‘constructive dismissal’?

Dismissals in Spain can be based on disciplinary or objective grounds.

In case of disciplinary dismissals, the employer has to evidence serious and wilful infringements carried out by the employee. If the infringements are proved, the employee is not entitled to any severance. Should the employer fail to prove these infringements, the court will declare the dismissal unfair. Grounds and procedure for the disciplinary dismissals are regulated by the Workers’ Statute or the relevant collective bargaining agreement.

In case of dismissals based on objective grounds, the employer must be able to prove, for example, all the economic, production-related, organisational or technical reasons. Should the employer fail to prove them, the dismissal will be unfair. Grounds and procedure for the objective dismissals are regulated by the Workers’ Statute.

As regards constructive dismissals, in case of serious infringements of the employer’s duties ordinary employees are able to ask for termination of employment with a severance equivalent to the unfair dismissal. In this type of situation top executives can also ask for termination with the severance applicable to the unilateral withdrawal.

Gardening leave

Are ‘gardening leave’ provisions typically used in employment terminations? Do they have any special effect on benefits?

Garden leave is not envisaged under Spanish law, which establishes the right of the employee to the effective occupation.

Waiver of claims

Is a general waiver or release of claims on termination of an executive’s employment normally permitted? Are there any restrictions or requirements for the waiver or release to be enforceable?

A clause in an employment contract renouncing any severance would be considered null and void. Waiver and release of claims in termination clauses could only be possible through the settlement of a termination agreement once termination has been communicated.

Post-employment restrictive covenants

Typical covenants

What post-employment restrictive covenants are prevalent? What are the typical restricted periods?

A post-employment non-competition agreement or clause is the most typical post-employment restrictive covenant. It has to be agreed expressly with the executive, responds to commercial rationales and is limited to a maximum of two years. The executive has to receive adequate compensation for the restrictive covenant.

Non-solicitation clauses are not envisaged under Spanish law. In practice they are usually part of non-competition agreements.


Are there limits on, or requirements for, post-employment restrictive covenants to be enforceable? Will a court typically modify a covenant to make it enforceable?

Non-competition agreements could be declared null and void before courts if they do not fulfil the requirements explained in question 32 (including adequate compensation). Clauses that leave to the employer the decision of applying the covenant or not have been declared null and void by Spanish courts.

Remedies for breach

What remedies can the employer seek for breach of post-employment restrictive covenants?

The non-competition agreement can envisage that should the employee fail to make the non-competition agreement, the employer could claim for the reimbursement of the financial consideration, and in addition punitive measures and damages that could be assessed by a court.

Pension and other retirement benefits

Required retirement benefits and incentives

Are there any required pension or other retirement benefits? Are there limits on discontinuing or modifying voluntary benefits that have been provided?

All employees affiliated to the social security pension scheme are entitled to a public retirement benefit. Both employers and employees have to contribute to this scheme. Also, collective bargaining agreements or employment agreements can establish additional retirement benefits.

Further, the employer can grant, unilaterally, or through an agreement with workers’ representatives, other types of pension or retirement plans. Discontinuation or modification of the latter types of pension or retirement plans can be deemed as collective substantial modification that must be grounded on certain reasons legally established and follow a consultation period with workers’ representatives.

Typical retirement benefits and incentives

What types of pension or other retirement benefits are prevalent for executives? Are there tax or other financial incentives or disincentives for such employee benefit arrangements?

Implementation of pension or other retirement benefits for executives is common practice in Spain in order to complement their public pension rights. Retirement schemes can be regarded as a powerful tool for companies in order to ensure the retention of experienced professionals.

Contributions or allocations paid by employers as pension commitments in the terms established by the First Additional Provision of the revised text of the Pension Plans and Funds Regulation Act, and in its developing regulations, have a special tax treatment when these are allocated to persons to which the benefits are linked.

In general, the tax allocation of said contributions to employees is of a voluntary nature (in such cases, there will be no impact on employees’ PIT returns), except in cases of:

  • risk assurance; and
  • tax insurance premiums that exceed €100,000 per year per taxpayer with respect to the same employer.
Supplemental retirement benefits

May executives receive supplemental retirement benefits?

Executives may receive supplemental retirement benefits in order to complement their public pension rights. The three main supplemental retirement benefits implemented by companies are pension schemes, collective insurances and long-term saving schemes, as follows:

  • Pension schemes are instruments promoted by the company for its employees that generate the right to perceive an economic benefit for retirement, invalidity or death. These instruments are subject to requirements of no discrimination (they must be offered to all the employees of the company).
  • Collective insurances for pension commitments are instruments that the company arranges with an insurance entity. The main difference from pension schemes is that collective insurances are not subject to limits on contributions and it is not mandatory to offer them to every single employee (the non-discriminatory principle is not applicable).
  • Long-term saving schemes are investments linked to reach a certain age of the executive in the company, but not necessarily to pension commitments.


Directors and officers

May an executive be indemnified or insured for claims related to actions taken as an executive, officer or director?

As mentioned in question 3, any compensation type in favour of the directors (including the compensations due to early termination indemnifications, insurance premiums and contributions to a savings system) needs to be approved by the general meeting of shareholders.

In addition, executive directors shall enter into an agreement with the company that needs to be approved by the board of directors. Such contract shall detail all the compensation types and amounts that the director is entitled to receive (including early termination indemnification, amounts to be paid as insurance premium and contributions to a savings system). It is not unusual that companies include within the compensation to be paid to a director payment of the insurance premiums related to the insurance policy contracted for civil claims against the relevant directors.

Change in control

Transfer of benefits

Under what circumstances will an asset sale in your jurisdiction result in an automatic transfer of benefit obligations to the acquirer?

Under Spanish law, a transfer of undertakings will be deemed to exist where the transfer relates to assets that compose an economic unit that maintains its identity, understood as a group of resources organised with a view to pursuing an essential or ancillary economic activity.

Executive retention

Is it customary to provide for executive retention or related arrangements in connection with a change in control?

It is customary that the directors have lock-up or exit provisions depending on the capital structure of the company that can be recorded in the relevant agreement with the director. It is also usual that retention bonus or bonuses related to the success of integration of businesses are offered to executives.

It must be borne in mind that top executives are entitled to terminate their employment with the payment of a severance in the event of succession of companies or change in the shareholding structure which results in a renewal of the company’s governing or managing bodies or in the content of the company’s main activity.

Expedited vesting of compensation

Are there limits or prohibitions on the acceleration of vesting or exercisability of compensation in a change in control? Are there restrictions on ‘cashing-out’ equity awards?

There are no legal limits or prohibitions on the acceleration of vesting or exercisability of compensation in a change of control.

Compensation plans frequently include mechanisms for foreseen change of control events. In any case, the terms and conditions of such compensation plans and their implications should be considered regarding a takeover bid process.

However, it should be noted that pursuant to the Companies Law, the acquisition of own shares or quotas or shares issued by the controlling company that will be delivered directly to employees or directors of the company, or as a result of exercise of option rights held thereby, requires the authorisation of the general meeting (which must state the terms of the acquisition).

Are there adverse tax consequences for the employer or the executive relating to benefits or payments provided pursuant to a change in control?

From the employer’s perspective, as long as payments of variable remuneration in case of a change of control are duly foreseen in the regulations of the incentive plans, the corresponding payment would be a deductible expense for corporate tax purposes.

From the employee’s perspective, as long as the payment of an incentive in case of a change of control takes place before two years from his or her participation in the plan, the generation period of the incentive would be less than two years and, as a consequence, the compensation could not benefit from the 30 per cent reduction established in the PIT for irregular income.

Multi-jurisdictional matters

Exchange controls

Do foreign exchange controls rules apply to the remittance of funds, or the transfer of employer equity or equity-based awards to executives?

As a general rule, exchange control and capital movements are fully deregulated; and in all areas, there is complete freedom of action. Having said this, certain transactions need to the reported depending on whether they are carried out by residents or not.

Residents have to fulfil certain reporting requirements (eg, bank accounts opened abroad must be declared to the Bank of Spain, and transactions with non-residents and holding assets or liabilities abroad must also be reported to the Bank), and the frequency of the notifications will depend on the volume of transactions carried out. In addition, the acquisition (and transfer) of shares in a Spanish corporation by a non-resident requires the filing of the relevant declaration forms for the investment at the Foreign Investments and International Commercial Directorate of the Ministry of Economy, Industry and Competitiveness.

In the same manner, residents who acquire shares in a foreign corporation also have to file the relevant declaration forms at the Foreign Investments and International Commercial Directorate.

Local language requirement

Must employment agreements, employee compensation or benefit plans, or award agreements be translated into the local language?

Employment contracts and main employment conditions and clauses attached to them are required to be registered in the relevant employment agency in Spanish. In case of conflict or claim before the courts, documents in a foreign language have to be translated into Spanish and the employee may allege lack of sufficient understanding of such documents.

Net salary arrangements

Are there prohibitions on tax gross-up, tax indemnity or tax equalisation payments?

The Workers’ Statute establishes that all tax and social security charges to be borne by the worker shall be paid by him or her, and therefore all pacts to the contrary will be considered null and void. Some courts have concluded that agreements establishing net amounts are null and void.

Notwithstanding the above, provisions on tax gross-up, tax indemnity or tax equalisation payments are used in Spain depending on the decision adopted by the employer company in relation to the level of protection guaranteed to their expatriates. In this regard, the most common system in Spain is the tax equalisation system as it guarantees the expatriate that his or her tax burden will not suffer any variation (both in a positive and in a negative sense) as a consequence of his or her assignment abroad. That is, the taxation of the employee will be exactly the same as if the employee had not been assigned abroad.

Choice of law

Are choice-of-law provisions in executive employment contracts generally respected?

Generally, employment courts apply Spanish law irrespective of the choice of law of employment agreements. Such application is based on a broad interpretation of minimum employment conditions under Spanish law.

Update and trends

Key developments of the past year

What were the key cases, decisions, judgments and policy and legislative developments of the past year?

Key developments of the past year47 What were the key cases, decisions, judgments and policy and legislative developments of the past year?

An appeal is currently pending resolution before the Supreme Court to determine if the indemnities provided in Royal Decree No. 1382/1985 for senior executives could benefit from the exemption established in the PIT for severance payments derived from the termination of employment contracts (up to €180,000).